Should you buy your new house first or sell first?

Note: This is the first part of a 2 part article:
Should you buy your new house first or sell first - part 2

So... Should you sell your house firts or buy first?

There are no real rules on this subject.

Let’s say that you have decided to begin looking for a new home and are faced with the decision of when you should put your existing home on the market.

Controversy and debate always surround this question!

Apparently, people who are faced with this question think that they should first find their next house and put it securely under contract. There is good grounds for this choice, although it is often the least prudent option of the two choices that are available.

By first finding your new home, you will:

• Know how much money (or equity) you will need to take out of your existing house in order to afford the new one.
• Know when you will need to finalize the sale of your current house in order to move into the new one.
• Know that you will have somewhere to live when you move out of your existing house.

Although the logic behind these reasons is more than sound, most people who are experienced in “moving up” or “upgrading” to another house will argue that it makes more financial sense to list your house first, and then begin the house hunting process.

The following scenario will help to demonstrate the serious consequences that can occur when someone commits to buying a property without having started the process of selling their current house.

Finding a new house before you sell
– A Case Study

Using the same logic as above, the Jones’ decide to first select their new house and then, once they know what it will cost them, put their existing house on the market.

They soon discover and fall in love with a house that meets all of their needs and dreams and they make an offer on it.

Their offer is accepted, but one of the clauses says that they are not allowed to make the offer dependent upon the sale of their first house (most sellers will not allow these contingencies).

The Jones decide to push the closing date out as far as the seller will allow them, which they believe will give them more than enough time to sell their house. They have four months to find a buyer and close the sale on their current house.

They rush to complete all the upgrades that had long been planned for their existing house, and manage to put their current house on the market the following weekend.

They price it where they have seen other similar houses sell, and they reasonably expect to attract some interest. And they wait.

The first two weeks there are a good number of showings, but then everything goes quiet. The market seems to have toned down a little, and the Jones begin to think they should lower their price.

Lowering their price is, however, giving them a bit of a concern, since they were counting on selling close to the current sales price and putting the proceeds into the purchase of their new house.

Four more weeks pass. There have been some showings, but few repeats. The real estate sales agent is doing everything: running ads, passing out flyers, and has held two Open Houses.

They finally get an offer, but this potential buyer also has a house they have to sell in order to close the deal.

Since the Jones’ can’t risk accepting this offer (it would mean taking their house off of the market while they wait for that buyer to sell his house) they have to turn the offer down.

The real estate sales agent knows they are feeling pressured, and suggests another price reduction. Now the Jones’ are worried that if an offer comes in much below this new low price, they might be hard pressed to accept it since they have to come up with the down payment on their new house.

The Jones’ are facing a payment deadline on their new house within five weeks, and they still don’t have a buyer for their current house.

They begin to look into securing a loan (a bridge loan), which would allow them to pay for their new house while carrying the mortgage on their existing house.

But bridge loans come with some stringent rules:

1. Lenders who offer bridge loans are hard to find. Very few institutions pursue this line of lending because it is short term and high risk.
2. To qualify for a bridge loan, the Jones must show enough income and net worth to carry both the existing and the new house. In other words, the lender views this as two different mortgages. Even if they are approved, the Jones are deeply concerned about their ability to pay both mortgages at once.
3. The rates on a bridge loan are not competitive.

This story only has three possible conclusions.

First, the Jones get lucky and accept an offer on their current house, which closes fast and without any problems. Unfortunately, they get considerably less than what they expected (the buyers knew that they were desperate to sell).

Second, the Jones find a bridge loan and carry the first house for another three or four months. The financial strain is extreme. They lose hundreds if not thousands of dollars of hard earned money. (They wonder whose idea was it to buy the new house without at least putting the current one on the market).

Third, the Jones do not find a buyer and they fail to secure a bridge loan. The seller of the house they made an offer on sues them. (Ouch!)

Selling your house FIRST puts you in a stronger buying position

From the above case study, its easy to understand that selling your current house before looking for a new one (or making an offer on a new one) has some advantages.

First, it puts you in a much better bargaining position… because you can make an unconditional offer to buy. If the house you are bidding on gets a second offer, the seller will certainly be favorable to your offer if the other offer is a conditional one.

The vendor, knowing that your offer is unconditional, is more likely to accept your offer. Better yet, if you position yourself correctly, you might get the house at a lower price.

There is a downside to selling your house before you find the new one… you might have to rent one if you can’t find one that suits you.

Another side effect is that you might feel pressured into buying a home that’s not what you want because you are simply running out of time.

Part 2: Buying a house before you sell

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